Westport Fuel Systems Inc

Westport Fuel Systems Inc (TSX: WPRT) is a provider of high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels. The company has three reportable segments Transportation, the Cummins Westport Inc (CWI) Joint Venture, and Corporate. Geographically, it derives maximum revenue from Europe and also has a presence in the Americas, Asia, and other countries.

Key Highlights 

• Appoints new director: Recently the company announced an appointment of Tony Guglielmin to the company’s Board of Directors, effective January 7, 2021.
• Focusing on HPDI technology: The Company’s HPDI business is still in the early stages of commercialization and as a result is currently generating losses. Meaningful increases in sales volumes are required for the HPDI business to benefit from economies of scale. The sales volumes continue to grow, and the growth is anticipated from supply arrangement with WWI, and additional OEMs entering into supply agreements for the HPDI technology. WWI has committed to purchase Westport HDPI 2.0TM components required to produce a minimum of 18,000 engines between the launch date and the end of 2023, which could turn into a significant milestone.
• Entered into an agreement with Scania: The group agreed to commence a research project with Scania to apply its HPDI 2.0 TM fuel system with hydrogen to the latest Scania commercial vehicle engine. Preliminary test results are expected in the second half of 2021.
• Improved liquidity: In the reported quarter, the company managed to increase its Cash balance by USD 17.4 million to USD 46.3 million, as a result of new borrowings and restructuring of the convertible debt completed during the quarter to secure liquidity to weather the impact of COVID-19 and continue its investment plans.

Source: Company 

Financial overview of Q3 2020 (In Thousands of USD)

Source: Company 

• In Q3 2020, the company’s consolidated revenues decreased by USD 10.0 million to USD 65.4 million, or 13% relative to the previous corresponding period. Sales decreased due to the impact of the COVID-19 pandemic and related plant closures during Q2 2020. However, sales rebounded in the third quarter by 82% over Q2 2020, due to the recovery in customer demand for Independent Aftermarket sales and growth in HPDI 2.0 sales volumes.

• Adjusted EBITDA in Q3 2020, stood at USD 4.0 million, compared to USD 9.4 million in the previous corresponding period. The decrease was primarily due to the lower gross margin achieved during the quarter and the one-time USD 3.3 million gain previously mentioned, partially offset by lower operating expenses.

• The company reported net income of USD 0.8 million in Q3 2020, compared to net income of USD 5.0 million in pcp. The reduction of USD 4.2 million in net earnings was primarily due to lower sales and lower gross margin. 

Risks associated with Investment

The company is prone to many risks associated with the nature of their business which could hamper the performance of the company, some of these risks are like fall in demand from automobile manufactures, disruptions from the supply chain, any technological change, increased prices of raw materials and commodities, etc.

Stock recommendation 

Although, the Company is focusing on HPDI technology business which is still in the early stages of commercialization and is currently generating losses. Meaningful increases in sales volumes are required for the HPDI business to benefit from economies of scale. The Company anticipates the growth from supply arrangement with WWI, and additional OEMs enter into supply agreements for the HPDI technology. WWI has committed to purchase Westport HDPI 2.0 components required to produce a minimum of 18,000 engines between the launch date and the end of 2023, which could turn into a significant milestone.

The stock has generated a return of 494.63% in the last three months and 116.15% in last one month. On the valuations front, the stock is trading at a forward EV to EBITDA multiple of 32.75x, which is gigantically higher compared to the industry median of 6.14x. Since the Company is trading on a very high NTM EV/ EBITDA multiple against the industry, we recommend an "Expensive" rating at the closing price of CAD 15.52 on February 8, 2021.

1-Year price Chart (as on February 08, 2020). Source: Refinitiv (Thomson Reuters)

CRH Medical Corporation

CRH Medical Corporation (TSX: CRH) is a healthcare products and services company. The company provides anesthesiology services to gastroenterologists across the United States. The group also specializes in the treatment of hemorrhoids utilizing its treatment protocol and patented proprietary technology. 

Acquisition Update:

On February 08, 2021, the company announced that it would be acquired by Well Health Technologies Corp. at a price consideration of USD 4.00 per share. The total transaction is valued at ~USD 369.2 million including, credit facility. The purchase price represents a premium of approximately 80% to the 30-day volume-weighted average price of the Company’s shares as of that date. However, completion of the acquisition is subjected to regulatory approval from the court, and shareholders, and is expected to be completed within Q2FY21.

Q3FY20 Financial Highlights:

• CRH announced its quarterly results, wherein the group posted a total revenue of USD 30.349 million, slightly lower than USD 30.414 million in the previous corresponding period (pcp). The decline was due to a lower income from product sales segment.
• The quarter was marked by significantly higher operating expenses at USD 30.264 million, as compared to USD 26.702 million in the previous corresponding period (pcp). The rise was due to higher anesthesia service expense (USD 26.963 million versus USD 23.774 million in pcp) and an increase in corporate expenses (USD 2.219 million versus USD 1.838 million in pcp).
• Operating income slide to USD 0.848 million from USD 3.712 million in pcp.
• The group reported net profit of USD 0.308 million, as compared to USD 2.099 million in Q3FY19.
• The company posted cash and cash equivalent of USD 5.099 million, while total assets were recorded at USD 214.247 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group reported an increase operating expense, which has dampened the company’s profitability and continuation of the above trend would take a toll on the overall performance.

Stock Recommendation:

Following the acquisition announcement, the stock soared ~80% on February 8, 2021. WELL would acquire CRH at a price consideration of USD 4, which turns out to be ~ CAD 5.08 at the exchange rate of 1.27 on Feb 8, 2021. Since it is an all-cash deal, completion of the transaction would result in the delisting of the CRH’s shares. The stock closed at CAD 4.98, which is ~2% below the acquisition price. This suggest there is negligible upside left in the stock. Hence, considering the aforesaid facts, we recommend an ‘Avoid’ rating on the stock at the closing price of CAD 4.98 on February 8, 2021.

CRH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.